Irish politicians during the past week have been playing the game of stating that Ireland does not want an E.U. / Euro-zone bailout (loan), not because Ireland can survive without a bailout but rather Ireland is trying to ensure that the strings attached to the inevitable bailout will not wreck the Irish economy for the next decade, especially as the likes of Germany (primary bailout funder) wants Ireland to raise its highly competitive 12% Corporation Tax that entices businesses across the E.U. to relocate to Ireland. Which I am sure that the Irish Government will intensely resist giving up, which therefore acts as a measure against which to evaluate the degree to which the Irish negotiators have been successful in gaining the bailout at a too high price for Ireland.

So that there is no confusion that a bailout is imminent, Patrick Honohan, the Governor of Irelands Central Bank gave the bailout negotiations game away with his statement this morning:

"There will be a large loan because the purpose of the amount to be advanced, or to be made available, is to show Ireland has sufficient firepower to deal with any concerns of the market, so we're ’re talking about a substantial loan, tens of billions, yes."

Bottom Line: Where Ireland is concerned, the E.U. will do its best to delay the inevitable debt default, which means a Eurozone bailout (one of a series) is imminent, because if one of the PIIGS defaults then so will they all which would require the mentioned Euro 2 trillion QE bailout virtually immediately (a Euro 750 billion bailout fund was announced in May), rather than perhaps Euros 80 billion for Ireland on its own at this stage of the crisis, and after Ireland will soon follow Portugal, then Spain, then Italy before the bailout cycle returns once more for another Greece bailout (probably sooner rather than later). All of which feed the Inflation mega-trend across the Euro-zone.

Ultimately much of the debt will be inflated away by higher Eurozone inflation (stealth debt default) coupled with some restructuring of Irish banks debts (outright debt default).

There is much speculation in the mainstream press and BlogosFear that the Euro-zone could collapse and that Germany will eventually leave the Euro under the weight of bailouts without end which is as a consequence of economies locked into the Eurozone that cannot competitively devalue their currencies against Germany industry and therefore are locked into an economic depression that Germany will periodically be forced to finance the budget deficits of to alleviate pressures within the Eurozone currency block.

The entire European Project is now at risk of disintegration, with strategic and economic consequences that are very hard to predict.

In a speech this morning, EU President Herman Van Rompuy (poet, and writer of Japanese and Latin verse) warned that if Europe’s leaders mishandle the current crisis and allow the eurozone to break up, they will destroy the European Union itself.

It is basically the same fear mongering garbage we have been hearing periodically for the past 2 years. Unfortunately the BlogosFear tends to take what's written in the mainstream press and magnifies it into an always imminent doomsday's / economic collapses to imply that the current crisis is about to rip European Union apart, which is just not going to happen as such commentary is completely blind to the fact that the primary purpose for the creation of the European Union is to prevent Germany from starting World War 3, so NO, there is NOT going to be a breakup of the E.U. Such fever pitch commentary reaches its heights usually just as the trends it purports to suggest as imminent evaporate, as illustrated by the past 3 years of U.S. Dollar collapse mantra which usually reaches its peak just as the Dollar bottoms, against which the reality is of a USD Index that is little changed from where it was 3 years ago!

Therefore reality does not match the E.U. collapse commentary which appears to be the exact opposite as NO European country has stated that it wants to leave the Eurozone instead countries within the European Union are lining up to JOIN the eurozone (Eastern Europe), and countries outside of the E.U. (Turkey) are just as eager to join the E.U. today then they were at any time before the crisis. So no breakup of the E.U. regardless how bad the current or future economic crisis become.

As is usually the case the mainstream press is at least 6 months behind the curve and the BlogosFear 90% of the time just regurgitates what is written in the mainstream press. My analysis of over 6 months ago came to many of the conclusions on the possibility of Germany and other strong industrial countries ultimately creating a second currency block that is being entertained today some 6 months later (11 May 2010 - E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt ).

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

Again those that suggest the E.U. will break up just do not understand why it was created in the first place and will continue to write every few months of its imminent collapse for the next 10 years, which follows the the long tradition of such commentary just as many have written of imminent collapse of the United States since the civil war some 150 years ago and continue to do so to this very day!

Whilst the mainstream press these past two months has been obsessed with the Greek debt crisis, the above graph clearly illustrates that a far larger debt crisis looms in Ireland that could soon transplant Greece in the debt crisis headlines over the coming months, similarly a number of other Euro Zone countries head the risk towards bankruptcy league table with Belgium and Portugal not far behind Greece. The price that these countries pay for being stuck in the Euro single currency is that they cannot devalue to try and gain some competitive advantage for their

Therefore 99% what you are reading in the the mainstream press is hot air as the E.U. has been trending towards a bailout of Ireland and the other PIIGS ALL YEAR. There is NO CURRENT Crisis as it has been planned for in advance, Politicians across the E.U. are using the black art of propaganda to prepare their populations for the eventuality of bailouts without end, therefore what we read in the press and see in the news bulletins is mostly smoke and mirrors, a phony eye candy crisis after the debt markets have been primed to deliver the periodically cues for bailout plans to be implemented all the way into a dual euro currency. Don't forget that the Bailout of the PIIGS is predominately a bailout of German, French and British Banks that have loaned monies to the PIIGS governments and their banks.

Most of Greek debt is held by German and French imbecilic banks, include the debt of the other potential defaulters Spain, Portugal and Greece and the amounts to $1.3 trillion of debt of which about 60% is held by French and German banks. Therefore the bailout of Greece is to prevent another banking sector collapse that would hit German and French banks hard and soon soon engulf the whole global financial sector and markets as the banking system again once more freezes, though this time the sovereigns as a consequence of the first bailout are not in a position to embark upon Global Financial Bailout 2, not when the markets expect, no DEMAND deficits to be cut or else they will dump the Triple AAA's down to Junk status.

The Euros 110 billion Greece bailout to finance the next 3 years of budget deficit and debt rescheduling will eventually amount to an INCREASE in Greece's debt burden by approx another 30% of GDP. Therefore Greece will remain stuck in an INFLATIONARY depression as it is FORCED to import inflation whilst at the same time its economy stagnates in nominal terms and deflates in real terms. In the meantime the credit markets will remain closed to Greece and increasingly to the other PIIGS.

Germany Profits From Keeping Bankrupt Countries on Life Support

Germany directly profits from the European PIIGS debt crisis as Germany's highly competitive industrial machine is able to export its goods and services to other European countries that cannot competitively devalue against Germany. Germany is further boosted by global exports as the Euro is KEPT Relatively WEAK against its major export markets such as the United States. If the Euro did not exist then the Deutschmark would have shot through the roof during the financial crisis which would have crippled German industry. In actual fact the German economy is bouncing back strongly whilst weak Euro-zone economies such as Greece are stuck in what is amounting to an Inflationary Depression, but there does come a point when Germany itself will suffer the consequences of inflation and thus be forced to RAISE Euro-zone interest rates which yes you've guessed it puts the whole Eurozone under an increasing debt interest burden.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy,interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREEDaily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Comments

Roman Rowlands
19 Nov 10, 12:30

USD Index

Hi Nadeem,

I keep thinking about your USD analysis & looking at its chart...I just don't see it falling off a cliff near 80. It makes more sense to see that drop materialising near 88. Technically it makes sense as JPY needs to retrace more, so does CHF, EUR is probably not done with retrace, nor does it inspire confidence as a USD alternative with all those issues unresolved regarding PIIGS, GBP is looking stronger, which coincides with your outlooks, USD/CAD is finding support. All on longer term charts as well. So, IMO for USD to resume bearish trend at ~80 there needs to be some sort of news shock to initiate Dollar dumping otherwise 88 seems like a fair target.

Nadeem_Walayat
19 Nov 10, 23:43

USD

Hi

Euro is 60% of the USD, Others are minor.

So far the forecast has not been negated so I don't see any reason for new analysis or to contemplate a trend to as high as 88, especially as it has yet to even fullfill 80.

And remember its not just dollar dumping to be anticipated but rather dollar printing....

Best

NW

Roman
28 Nov 10, 17:07

EURUSD

Thank you for replying Nadeem.

What about the following possibility, likely or not in your opinion?

2008 - 1

2009 - 2

2010 - 3 Sell

Current Euro top is a sell of upper TL monthly basis (123 Sell)

???

jonnysingapore
29 Nov 10, 10:59

averaging into a position

If you're concerned about dollar strength, then why not analyse resistance levels and put percentages of positions in at different levels, with stop loss to protect your rear?

That way you climb the ladder as it arrives and jump off when you need. Fairly standard stuff no? Trying to guess exact tops and bottoms is exhausting and lets face it - if you knew how to do it, you'd already have retired!!!

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